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July 3, 2013

At Midyear, Bob Doll Judges His Top 10 Predictions for 2013

‘Anxiety remains over the Fed ending its QE experiment, and financial issues in China are cause for concern,’ says Nuveen’s Doll

So how did Doll do? By his own accounting, he got five predictions right and three wrong, and two are still too early to call.

Summing up his market calls, Doll (left) on Monday wrote in “A Mid-Year 10 Predictions Assessment” that equities had a strong six-month period despite a May and June correction primarily due to a very difficult bond market.

“Perhaps the ‘great rotation’ started late in the second quarter as investors moved from bonds and bond-like equities, with measured progress for cyclical and growth equities,” Doll said. “Anxiety remains over the Fed ending its quantitative easing experiment, and there are also financial issues in China that are cause for concern.”

Looking ahead, Doll ventures that the big question will be the Federal Reserve’s exit strategy from quantitative easing: “What does this look like and does it work?” Also, he wants to see how financial concerns in China play out, and he wonders whether nominal growth will be strong enough in the U.S. and globally for earnings to improve.

“It appears as if the multiple-driven equity market is finished, and we will need better earnings for the equity market to move higher,” Doll concludes.

On the next pages, read about Doll’s five correct predictions followed by the three he got wrong and the two that are still too early to call.

1) The U.S. economy continues to muddle through with nominal growth below 5% for the seventh year in a row.

“Real GDP in the U.S. will be around 2% with inflation at 2%, equating to nominal growth of 4%,” Doll writes. “The private economy is potentially growing closer to 3% (real), with the dampening factors being sequestration and fiscal drag.”

“Certainly the U.S. yield curve has steepened,” Doll asserts. “The 10-year U.S. Treasury yield began the year at 1.84% and has flirted with 2.60%. We anticipate it will settle in the 2.40% to 2.60% range. The 10-year yield was as low as 1.68% during the commodities sell-off early in the second quarter.”

3) U.S. stocks record a new all-time high as stocks advance for the fifth year in a row.

“U.S. equities are off to a good start as the S&P 500 has increased 13.82% through the second quarter," Doll says. "The P/E ratio continued to rise as has been the case since the end of 2011, although earnings growth has been mediocre.”

4) Dividends increase at a double-digit rate as payout ratios rise.

“Dividends are growing faster than earnings and payout ratios are moving up,” Doll writes. “In fact, dividends are up more than the stock market year to date, which means the yield on the equity market is higher today than at the beginning of the year.”

“This is heading in the right direction,” Doll writes. “The U.S. has the benefit of cheap natural gas versus big industrial export competitive countries like Japan, Germany and Korea. Manufacturing has been mixed in the U.S. and is generally doing better than the overall economy.”

2) After two years of underperformance, U.S. multinationals outperform domestically focused companies.

“While this prediction is not out of the question, there is some catching up to do," Doll says. "Multinational companies have lagged because of concerns in the emerging markets and Europe.”

3) The U.S. government passes a $2 trillion to $3 trillion 10-year budget deal.

“Our position has been that this would be gradual,” Doll writes. “The U.S. federal budget deficit has decreased based on modest revenue increases and expense cuts largely due to acrimony between the two parties in the absence of an agreement. So we may get the notion of this right, but the facts may be wrong.”

The Two Predictions That Bob Doll Says Are Still Too Early to Call:

1) Europe begins to exit recession by the end of year as the European Central Bank eases and financial stresses lessen.

“The good news is that European financial stresses seem to be on the back burner,” writes Nuveen’s chief equity strategist. “Europe remains in a recession, although there are some signs that the recession is becoming less of a negative.”

“Large and small caps have been in a close race for some time now,” Doll says. “Cyclicals have picked up steam, as the defensive companies led by utilities and telecom significantly underperformed in the second quarter, after doing reasonably well in the first quarter.”